Oil prices rise on renewed risk appetite, tight OPEC supply

[MongiIG]

Oil prices rise on renewed risk appetite, tight OPEC supply

CommoditiesJan 11, 2022 

 

 

 

© Reuters. FILE PHOTO: A 3D printed oil pump jack is seen in front of displayed Opec logo in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration

By Sonali Paul and Koustav Samanta

SINGAPORE (Reuters) - Oil prices climbed on Tuesday, with investors regaining some risk appetite as they await clues from the U.S. Federal Reserve chairman on potential interest rate rises and as some oil producers continued to struggle to beef up output.

Brent crude futures gained 40 cents, or 0.5%, to $81.27 a barrel at 0529 GMT, after dropping 1% in the previous session.

U.S. West Texas Intermediate (WTI) crude futures rose 52 cents, or 0.7%, to $78.75 a barrel, after falling 0.8% on Monday.

A weaker U.S. dollar helped support oil prices on Tuesday, as it makes oil cheaper for those holding other currencies.

A U.S. Senate committee holds hearings this week for Federal Reserve Chair Jerome Powell and vice chair nominee Lael Brainard that could provide new details about the U.S. central bank's plans to tighten monetary policy.

Recent oil price declines had been driven by worries about soaring cases of COVID-19 around the world potentially sapping fuel demand.

"Rising virus cases are a cause of concern as restrictions impact mobility and thereby fuel demand," said Ravindra Rao, head of commodity research at Kotak Securities. "However, despite the sharp rise in cases, none of the major economies are looking at severe lockdowns."

"The virus situation, supply-related issues and trends in equity markets will be key factors affecting crude oil in the near term," he added.

Some analysts said tight supply from the Organization of Petroleum Exporting Countries (OPEC), Russia and allies, together called OPEC+, not keeping up with demand was also supporting prices.

"The market could still benefit from tighter supplies and supply risk from Russia," ANZ Research commodity analysts said in a note. Political tension has mounted as Russia has amassed troops on the border of Ukraine.

Analysts pointed to OPEC supply additions running below their allowed increase under the OPEC+ pact, as some countries, including Nigeria, are not producing their agreed volumes.

"The fundamentals remain bullish for crude again - especially if OPEC continues to struggle to hit its quota as part of the 400,000 barrels per day monthly increases, as demand strengthens," said OANDA analyst Craig Erlam.

Libya, which is exempt from OPEC supply curbs, has been hit by pipeline maintenance work and oil field disruptions. However on Monday, production resumed at the El Feel oil field, where an armed group halted output last month.

 

The market is waiting on U.S. oil and product inventory data from the American Petroleum Institute (API), an industry group, due at 2130 GMT on Tuesday, followed by data from the U.S. Energy Information Administration on Wednesday.

Six analysts polled by Reuters expect U.S. crude stockpiles fell by about 2 million barrels in the week to Jan. 7, which would mark a seventh straight week of declining crude inventories.

[MongiIG]

Crude Oil Prices at Risk on Powell Hearing, Waning Demand Cues

CRUDE OIL OUTLOOK:

• Crude oil prices edge lower in broadly risk-off trade but volatility is muted
• Fed Chair Powell due at Senate hearing, data may signal waning demand
• Key chart resistance eyed near $80/bbl, support anchored above $75/bbl

Crude oil prices edged lower for a second day consecutive day on Monday, in a move that broadly echoed swings in broader risk sentiment with far less volatility than what appeared on benchmark US equity indices. An initial selloff – seemingly driven by worries about a hawkish Fed – gave way to recovery late into the day.

For the WTI contract, this translated into a loss of 0.85 percent, as compared to a near-term trend average daily swing of about 1.5 percent. Put simply, crude did not have a particularly volatile day. Contrast that with the S&P 500, which fell as much 2.1 percent before an about-face turn that cut the loss to just 0.12 percent.

FED OUTLOOK IN FOCUS ON POWELL HEARING. IS CRUDE DEMAND WANING?

Fed policy speculation is likely to remain at center stage, with all eyes now turning to today’s Senate confirmation hearing for Chair Jerome Powell. The US central bank chief seems likely to stick to an inflation-fighting spirit as officials attempt to talk down stubbornly sticky price growth expectations. That might weigh on oil.

An updated short-term energy outlook report from the EIA as well as the API estimate of weekly US inventory flows are also due to cross the wires. Demand projections have slipped recently even as output bets stabilized after a fall. Meanwhile, refined-product storage has grown even as crude stocks have drained.

On balance, this warns that cooling economic growth and perhaps disruptions linked the Omicron variant of Covid-19 may be crimping end demand. That could filter back upstream as signs of excess supply that weigh on prices. If that begins to show this week alongside hawkish Fed-speak, crude prices seem vulnerable.

 

CRUDE OIL TECHNICAL ANALYSIS

Prices are hovering near resistance capped at 79.60, with early signs of negative RSI divergence warning that upside momentum is ebbing. This may speak to consolidation, but could also precede a reversal downward. Initial support is anchored at 75.27, with a break below that exposing the congestion area extending down into 72.52. Alternatively, breaking resistance may see extension higher toward the 2021 top at 85.41.

Crude oil price chart created using TradingView

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Written by Ilya Spivak, Head Strategist, APAC for DailyFX. 11th Jan 2022.